403(b) Retirement Plans

A 403(b) is an employer sponsored retirement savings plan that allows you to save pre-tax dollars for your retirement. A Roth 403(b) permits only after-tax contributions but allows you to diversify your tax risk by letting eligible participants make tax-free withdrawals after retirement.

• Public education institutions
• Church and church affiliated employers
• Nonprofit organizations under Section 501(c)(3) of the Internal Revenue Code, The 501(c)(3) Code section describes employers organized for educational, charitable, scientific, or religious purposes. Also included are nonprofit hospitals and health-related entities.

Your employer must establish a 403(b) plan. Once the plan is established, you must enter into a salary reduction agreement with your employer. This agreement authorizes your employer to reduce your salary by the dollar amount you have selected to contribute to an approved investment provider, thus reducing your current Federal tax liability.

• Lower Taxes: Your contributions are pre-tax which lowers your taxable income. Lower taxes means you keep more of your money.
• Tax-Deferred: Your contributions grow on a tax-deferred basis allowing your plan to compound at a greater rate than a taxable account.
• Supplement to Pension: While many employees of educational institutions and nonprofit organizations have access to a pension program, most pensions do not supply income equal to pre-retirement salary. A 403(b) plan can supplement current pension plans.

Social Security taxes and benefits are based on your gross salary without taking into account the amount that you may be contributing to the 403(b) plan. For example, if you defer $5,000 of a $40,000 salary, your W-2 will show federal taxable income of $35,000 instead of $40,000. Social Security tax (FICA) is calculated on your gross salary of $40,000.

The universal availability requirements of a 403(b) plan mandate that once a plan has allowed one employee to enter into a salary reduction agreement, all employees of the organization must be extended the same opportunity. Certain employees may be excluded, including: employees who will contribute $200 annually or less; those who are participants in an eligible deferred compensation plan [457 or 401(k)] or participants in another 403(b); non-resident aliens; and certain students and employees who normally work less than 20 hours per week.

You are allowed to contribute 100% of your includable compensation up to the elective deferral limit, as indexed. Includable compensation is your gross compensation less any pre-tax deductions. The chart contains the dollar limits set by the IRS. Catch-up contributions are allowed for those who are 50 or older in the given calendar year. An additional catch-up may be available if you are an eligible employee and have at least 15 years of service. The actual amounts may vary based on your employers specific plan design.

Yes, you can choose the amount you want to defer. There may be minimum contribution amounts set by the plan as well as the investment selection that you choose.

Yes, generally you can stop or change your deferral amount at any time. Your employer may limit the number of deferral changes you can make in a year.

No, all of your contributions must be from salary reduction through your employer.

There are specific rules relating to excess contributions and an IRS penalty tax is usually assessed. It is best to correct the error as soon as possible if your contributions exceed the limit.

Your contributions go into the plan on a pre-tax basis, allowing you to reduce your taxes during your working years. You will be taxed on this money as you withdraw it at retirement.

You must qualify under the IRS guidelines to take withdrawals. Normally you can withdraw your funds when you attain age 59 ½, terminate employment, retire or become disabled. Your beneficiaries can withdraw funds upon your death. Your plan may also allow for loans, hardship withdrawals or in-service distributions. Withdrawals taken before age 59 ½ may incur a 10% excise tax in addition to Federal income taxes. You must qualify to take withdrawals before you can roll over to another eligible plan or IRA. Surrender charges may also apply.

While you do have access to your funds, you should look to other alternatives first. Your 403(b) plan is intended for retirement purposes, and early withdrawals can limit the positive effects of compound interest. The IRS allows withdrawals due to financial hardship. A hardship distribution is one that is made because of the immediate and heavy financial need of the employee which cannot be met from other resources. Hardship withdrawals must be approved by your employer. Your plan may allow for policy loans, which may be a better alternative.

The IRS requires that you begin taking distributions no later than April 1st following the year you attain age 70 ½ or retire.

If your new employer is eligible, and the plan is willing to accept the funds you may continue your 403(b). If not, your 403(b) may simply remain inactive whereby no new contributions will be accepted; however it may continue to accrue earnings. You may also roll over your 403(b) into a traditional IRA, 401(k), 457 or another eligible qualified plan.

Once you qualify for a withdrawal, you may roll over any percentage of your distribution into a traditional IRA, 401(k), 457, or any other eligible plan. You may also be eligible to roll into a Roth IRA.

The benefits are dependent on your current situation. You may have additional investment options available in an IRA, as well as the ability to consolidate multiple accounts. You have control of your IRA while you employer maintains control of the 403(b) plan. You do have advantages in your 403(b) plan that are not available in an IRA. Loans may be available in your 403(b); there are special exemptions under a 403(b) for premature withdrawals; and the required minimum distribution (RMD) is waived if you participate in a 403(b) and continue active employment.

Your plan may allow you to select various forms of payout. Generally these include a variety of annuity, systematic withdrawal or lump-sum distributions.

You can have multiple plans along with your 403(b). You are subject to the traditional IRA rules regarding deductibility and the compensation levels as well as the Roth IRA rules for eligibility.

You may invest with more than one provider. You are still subject to the contribution limits, and must only contribute to the employer approved providers. If you participate in more than one plan, you must aggregate contributions to all plans in determining your elective deferral limit.

If eligible, you may contribute to both plans. The maximum you may contribute is a total of 100% of includable compensation up to the effective deferral limit of each plan. This feature may allow you to double your contributions, as the elective deferrals are not aggregated. If you are eligible for the “age 50” catch-up, the catch-up contributions must be aggregated and are subject to the “age 50” catch-up limit.

You may be allowed to transfer all or a portion of your account from one approved provider under the Plan to another approved provider. Plans can limit the ability to transfer and may also limit the number of transfers allowed.